Diodes Inc (DIOD) 2009 Q4 法說會逐字稿

Good afternoon and welcome to the Diodes Inc. fourth-quarter and fiscal 2009 financial results conference call. (Operator Instructions). As a reminder, this conference call is being recorded today, Tuesday, February 9, 2010.

I would now like to turn the call to Leanne Sievers of Shelton Group, the investor relations agency for Diodes Inc.. Leanne, please go ahead.

Good afternoon and welcome to Diodes's fourth-quarter and fiscal 2009 earnings conference call. I'm Leanne Sievers, Executive Vice President of Shelton Group, Diodes' investor relations firm.

With us today are Diodes' President and CEO Dr. Keh-Shew Lu, who is joining us from Taiwan; Chief Financial Officer Rick White; Senior Vice President of Sales and Marketing Mark King; and Vice President of Finance and Investor Relations Carl Wertz.

Before I turn the call over to Dr. Lu, I would like to remind our listeners that management's prepared remarks contain forward-looking statements which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the Company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today, and therefore we refer you to a more detailed discussion of the risks and uncertainties in the Company's filings with the Securities and Exchange Commission. In addition, any projections as to the Company's future performance represent management's estimates as of today, February 9, 2010. Diodes assumes no obligation to update these projections in the future as market conditions may or may not change.

Additionally, the Company's press release and management statements during this conference call will include discussions of certain measures in GAAP and non-GAAP terms. Included in the Company's earnings release is a reconciliation of GAAP net income to non-GAAP adjusted net income, which provides additional details.

For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 60 days in the investor relations section of Diodes's website at www.diodes.com.

And now, I will turn the call over to Diodes's President and CEO, Dr. Keh-Shew Lu. Dr. Lu, please go ahead.

Thank you, Leanne. Welcome, everyone. Thank you for joining us today.

I'm pleased to once again report another solid quarter of profitable growth for Diodes. Our fourth quarter was highlighted by a 50% increase in revenue over the prior-year period and an 80% increase in gross profit. Revenue for the quarter increased, primarily due to market-share gains at new and existing customers, combined it with continued strength in Asia and the further improvement in North America and Europe.

Our revenue results are evidence of our market-share gains and the design-win momentum, as our revenue this quarter was 97% off the $134 million record revenue we achieved in the third quarter of 2008.

Gross margin improved to 32.1% as our packaging facility continued operating at full capacity and utilization improved at all wafer fabs in Kansas City and the UK. We expect additional upside in gross margin in the coming quarters, due to further improvements in utilization at our wafer fab, combined it with our new product in this case.

For the year, revenue reached a record of $434.4 million, which is a significant accomplishment during one of the most challenging periods that our industry and the economy has experienced in quite some time.

Other noteworthy accomplishments in 2009 included, first, we implemented cost-reduction initiatives in response to economic environments that improved our profitability while growing revenues, result in our 19th consecutive year of profitability. GAAP net income was $7.5 million, or $0.17 per share, and non-GAAP adjusted net income was $24.1 million, or $0.55 per share.

Second, we achieved positive cash flow for operations every quarter during [that] time. As a result of our efforts to reduce debts, inventory level, and authorization on capital expenditures for the year, cash flow from operations amounted to $65.5 million, net cash flow was $138.5 million, and free cash flow was $43.1 million.

The significant improvements in our cash position enables further expansion of opportunities for the Company in the future.

Third, we consistently improved our factory utilization at our packaging facilities and wafer fabs throughout the year, increasing gross margin to 32.1% in the fourth quarter from the goal of 18.6% in the first quarter of 2009.

Fourth, we also continued to invest new product developments and achieved a high level of design wins that contributed to increased market share and a strong revenue growth in the last three quarters of the year, and we expect to continue that momentum into 2010.

Lastly, we continued to strengthen our balance sheet and repurchase approximately $48 million of our convertible senior notes, reducing the notes outstanding to $135 million par value.

As a result of those achievements, the Company has returned it to our profitable growth model, and I believe we have emerged from the downturn as a stronger Company with expanded growth opportunity as we enter 2010. We expect continued growth momentum in the first half of the year and we remain positive of our outlook due to design-win traction and new product introductions.

Despite the first quarter being a typically seasonally slow period for our markets, we are seeing stronger customer demand in the consumer and the communication markets, in particular for our product [I/O] lights in panels for LCD and LED TV, as well as smart phones and the set-top box.

We are also continuing to see market stimulation in North America and Europe. As a result, the first quarter of 2010 will represent our fourth consecutive quarter of growth, corresponding to a year-over-year increase of approximately 70%.

With that, I will turn the call over to Rick to discuss our fourth-quarter financial results and first-quarter guidance in more detail.

Thanks, Dr. Lu, and good afternoon, everyone. As Dr. Lu mentioned, revenue for 2009 was a record $434.4 million, an increase over the $432.8 million in 2008.

For the fourth quarter, revenue was $130.3 million, an increase of 50% over the $87.1 million in the same period last year and an increase of 7% over the $122.1 million in the third quarter of 2009.

Gross profit for the fourth quarter of 2009 was $41.8 million, or 32.1% of revenue, compared to $22.9 million, or 26.3% in the fourth quarter of 2008, and $37.6 billion, or 30.8% of revenue in the third quarter of 2009.

The 130 basis-point sequential increase in gross margin was primarily attributable to continued improvements in utilization at our wafer fabrication facilities, as well as the stable pricing environment. During the quarter, our packaging capacity continued to be fully utilized with output from our China facilities at 5.2 billion units, up over 5% from the third quarter.

Our wafer-fab utilization continues to increase at both facilities, which we expect to further benefit gross margin in the first quarter of 2010. Total operating expenses amounted to $28 million, or 21.5% of revenue, in line with the 21.6% last quarter.

Looking specifically at selling, general, and administrative expenses for the fourth quarter, SG&A was approximately $20 million, or 15.4% of revenue, compared to $19.1 million, or 15.6% of revenue last quarter. Investment in research and development for the fourth quarter was $6.8 million, or 5.2% of revenue, which was comparable on a percent-of-revenue basis to the $6.3 million, or 5.1% of revenue, in the third quarter.

Total other expenses amounted to $2.3 million for the fourth quarter. Looking first at interest income and expense, we had approximately $1 million of interest income, primarily related to our portfolio of auction rate securities, and interest expense of $1.8 million, primarily related to our convertible senior notes and our loan for the acquisition of Zetex.

During the fourth quarter of 2009, we recorded a pretax non-cash amortization of debt discount of approximately $1.8 million.

As stated previously, effective January 1, 2009, U.S. GAAP requires us to separately account for a liability and equity component of our convertible senior notes. For the full year of 2009, this additional pretax amortization of debt discount expense amounted to approximately $8.3 million.

Turning to income taxes, our income-tax benefit was approximately $3.6 million, which was basically in line with our previous guidance.

Fourth-quarter GAAP net income was $14.2 million, or $0.32 per diluted share, as compared to net income of $7 million, or $0.16 per diluted share last quarter. The fully-diluted share count used to compute GAAP earnings per share for the fourth quarter was 45.1 million.

Non-GAAP adjusted net income was $16.3 million, or $0.36 per diluted share, which excluded, net of tax, $1.1 million of non-cash interest expense related to the amortization of debt discount on the convertible senior notes, $900,000 of non-cash acquisition-related intangible asset amortization costs, and nominal amounts for forgiveness of debt and loss on extinguishment of debt. This compares to adjusted net income of $9.1 million, or $0.21 per diluted share, in the third quarter of 2009.

We have included in our earnings release a reconciliation of GAAP net income to non-GAAP adjusted net income, which provides additional details. Included in fourth-quarter GAAP and non-GAAP adjusted net income was approximately $2.2 million, net of tax, non-cash, share-based compensation expense. Excluding this expense, both GAAP and non-GAAP adjusted diluted EPS would've increased by an additional $0.05 per share.

Cash flow for the fourth quarter amounted to $21.5 million from operations, $115.9 million net cash flow, and $12 million free cash flow.

For the year, cash flow from operations was $65.5 million, net cash flow was $138.5 million, and free cash flow was $43.1 million.

Turning to the balance sheet, at the end of the fourth quarter, we had $539 million in cash and short-term investments, consisting of approximately $242 million in cash and $297 million in short-term investments of par-value auction-rate securities. The auction-rate securities, which have been fully borrowed against, resulting in a related current-liability no-net-cost loan of $297 million, can be put back to UBS AG at par on June 30, 2010, under the previously disclosed settlement.

Our working capital at quarter end was approximately $354 million, and long-term debt, including the convertible senior notes which are redeemable in October 2011, was approximately $125 million carrying value.

Now turning to inventory, at the end of the fourth quarter, inventory was approximately $90 million, which was an increase of approximately $7 million over the third quarter due mainly to an increase in raw materials and WIP, which was in line with the revenue increase. Finished goods at $32.3 million was down 30% from year-ago levels.

Inventory days were 88, same as the third quarter of 2009. Accounts Receivable was approximately $103 million and AR days were 71.

Capital expenditures were approximately $10.1 million during the fourth quarter, or 8% of revenue, and $25.9 million for the full-year 2009. We continue to authorize CapEx at our model rate of between 10% and 12% of revenue to grow our packaging capacity in line with demand. However, lead times on equipment are extending, causing a delay in the booking of expenditures relative to the respective authorizations.

Depreciation and amortization expense for the fourth quarter was $12.1 million and $47.2 million for the full year of 2009.

Turning to our outlook, as previously discussed, we expect a stronger first quarter than our typical seasonality, and estimate revenue to range between $131 million and $137 million, up 0.5% to 5% sequentially. Additionally, with a favorable pricing environment and continued improvements in utilization at our wafer fabrication facilities, we expect first-quarter gross margin to range between 32% and 33%.

First-quarter operating expenses are anticipated to decrease slightly from fourth-quarter levels on a percent-of-revenue basis. In terms of capital expenditures, as I just mentioned we continue to authorize at our model rate of between 10% and 12% of revenue.

We also expect our income tax rate for the first-quarter and full-year 2010 to range between 10% and 17%.

With that said, I will now turn the call over to Mark King, Senior Vice President, Sales and Marketing. Mark?

Thank you, Rick, and good afternoon. As Dr. Lu mentioned, we achieved another solid quarter of growth due to continued market-share gains and design-win momentum.

Overall, our markets are solid, driven by continued strength in Asia, as well as steady improvements in North America and Europe. These positive trends across all regions of our business are setting the stage for a strong first half for Diodes going into 2010.

In particular, we continue to achieve significant gains in MOSFETs, SBR devices, and bipolar transistors, as well as increases in analog new-product revenue from LED drivers, call centers, and USB power switches.

Diodes' MOSFET portfolio had record bookings during December, and lead times are lengthening. This bodes well for continued growth in this product line throughout 2010.

We also achieved strong momentum on SBR products in Asia with significant demand and volume growth, as well as continued upside in all areas from LCD and LED televisions to laptop power supplies. There is also growing interest for these products in Europe and North America. The competitive advantage of the SBR over conventional diode technology is evident in the increasing number of design wins.

Additionally, our Zetex mid- and high-performance bipolar transistor also achieved strong growth in the quarter, primarily due to ramping of designs in smart phones, as well as increased momentum in the distribution channel. The increased opportunities in voice over IP, LED driving, and various phone applications for these products provide a strong foundation for continued growth in 2010.

In terms of our end-market breakout, computing represented 31% of revenue, consumer 32%, industrial 18%, communication 16%, and automotive 3%.

Asia represented 77% of total revenue, growing 5% over the third quarter, led by continued strength in LCD and LED TVs as well as panels, set-top box, and low noise block LNB converter products. We did see a slight decline in notebooks during the quarter, yet performance was still better than typical seasonality.

Distributor POP grew as a result of an aggressive effort by our Chinese distributors to rebuild strategic inventory in support of the Chinese New Year. Distributor inventory increased to approximately two months. This level is less than the normal year-end distributor inventory level in Asia and less than the fourth quarter of 2008, which was 2.8 months.

Design activity in Asia remained strong in the fourth quarter and included 16 different wins for our USB switches, power ICs, and LED lighting products. In total, we had 17 wins at 62 customers during the quarter.

As I mentioned last quarter, we are pleased with our continued progress and account development in the China market. Increasing our market share in China is a key strategic initiative for Diodes, as we consider the China market a major growth driver.

In North America, fourth-quarter sales represented 13% of total revenue and increased 20% over the third quarter. OEM sales were driven by strength in set-top box, as well as initial signs of improvement in our industrial account base.

Distributor POS and POP grew in the quarter, while inventory was up 2%, but still remained at all-time lows. Our backlog was strong once again, positioning us for further growth in North America in the first quarter.

Overall, near to midterm outlook from both OEMs and distributors is positive. Design activity in North America also remains strong and momentum continued with 62 total design wins, highlighted by nine analog wins, one hall sensor, two LED drivers, three SBRs, and 20 MOSFETs.

Sales in Europe accounted for 10% of total revenue in the quarter and increased 17% from the third quarter. The growth demonstrates further signs of recovery in the region following solid sequential growth achieved last quarter.

OEM sales grew double digits for the second consecutive quarter, with sales to automotive customers up 6% sequentially. Direct sales to consumer accounts gained 7%, and sales to industrial customers grew for the first time in 2009 with a strong rebound of 49% quarter over quarter.

Distributor POS exceeded distributor POP, and was up 16% over the third quarter. Inventory remained flat, and the distributor outlook is positive. We begin 2010 with a very strong customer backlog and expect further improvements in the first quarter.

Now turning to new products, new-product revenue was $16.2 million in the fourth quarter, representing 12.5% of total revenue, compared to 16.5% of sales last quarter. The decrease in new-product revenue was primarily due to the aging out of some MOSFETs, ASMIC, and TVS products, as well as quarterly and equipment mix.

During the fourth quarter, we released 54 new products, consisting of 20 analog products across five device families, including three LED drivers, eight USB switches, and seven hall sensors, and 34 discretes consisting of eight bipolar devices, nine SBR devices, and 17 MOSFETs for notebook, PC, voice over IP, and mobile phone applications.

We continue to see new-product revenue increase from our USB power switch family with further penetration in notebook and set-top box. The quarter-over-quarter growth rate was almost 50% for this product line. This trend is expected to continue in 2010 and -- as more new products are released to the market that offer higher current, lower Rds(on), and discharge features.

The reset devices are gaining popularity in applications where particular power rails are monitored for better systems power management. More development in the reset family is under way to further expand our device portfolio in 2010.

For hall sensors, new product represented over 60% of the revenue in this product line, driven by Asian notebook and cell phone market. Similarly, new LED products represented 77% of total family revenue, and we anticipate the percentage of new LED driver revenue to continue to increase.

In terms of global design wins, in-process design activity remained high with wins at 146 accounts globally -- 75 wins at 60 customers in Asia, 62 wins at 32 customers in North America, and 76 wins at 54 accounts in Europe. Design wins and in-process design activity were broad-based in both product and end equipment. Design activity was highest in our core products in target and equipment at key accounts, which we believe will drive additional revenue growth in 2010.

We continue to see the strongest momentum on the analog side in USB switch, LED drivers, and LDOs, as well as MOSFETs, bipolar transistors, and SBRs on the discrete side.

In summary, our continued strong performance and revenue growth is evidence of our successful execution on new-product initiatives and market-share gains. The expanded customer base that we obtained through our acquisition of Zetex has provided Diodes a larger sales footprint and broadened our global presence.

We continue to maintain our investment in technology innovation to enhance our design activity and further capitalize on the product synergies and cross-selling opportunities which I believe have just begun to be exploited. As Dr. Lu mentioned, we expect the first quarter to be stronger-than-normal seasonal patterns as a result of increased customer demand for our products that are utilized in panels for LCD and LED TVs, smart phones, and set-top boxes.

We are very encouraged by the positive trends that we are seeing for our business and believe that Diodes is well positioned for increased growth opportunities in the first half of the year.

With that, I'll open the floor to questions. Operator?

(Operator Instructions). John Vinh, Collins Stewart.

Congratulations on the quarter, guys. First question on the guidance. The guidance obviously above seasonal, but slightly below some of the guidance that some of your peers have given. Is your guidance still a capacity constraint? Can you talk a little bit about that?

John, let's look at how do we go through. We grew 33%, then 18%, then 17 -- 7% quarter over quarter through our last year. And if you look at our guidance, you know, [deed respire] the seasonally Q1 typically is the lowest quarter of the year, we have a very good possibility we're going to set the new revenue record for our Company.

Therefore, the reason is we have grew very strongly quarter over quarter the last three quarters. Now Q1 is the fourth consecutive quarter continuing growth. So I think we actually recover much faster, earlier than our peers.

So when you focus on the Asian markets and you focus on consumer computer communication type of market, I think we have been -- grow faster and recovery faster than our peers.

Okay, so just to clarify, it doesn't sound like capacity is going to be an issue for you in Q1.

Well, it's still. But we continue to invest. If you remember our last-quarter conference call, I always say we return into the profitable growth mode, and therefore, since September we have been start to put in investment in our capacity expansion.

And therefore, yes, we still continue constrained by our packaging -- I'm more talking about packaging output. We're still really constrained by that, but we have increased our capacity too.

Then turning to inventory, you talked about some of the DC inventories increased slightly in Q4. What do you anticipate that the DCs are going to do with inventories in Q1? Are they going to going to be able to continue to build a little bit of inventory in Q1? And then, the follow-on to that is what does that imply for kind of your seasonality of the rest of the year? If they are building inventory in Q1, does that kind of imply that maybe Q2 might be a little bit less than seasonal?

In our business, typically 4Q -- the distributor build up some inventory, and it's because everybody gets -- every year, everybody gets ready for the Chinese New Year in Q1.

So, it's typical if you up some inventory when, in fact, this year, or 2009, the inventory build is actually less than in the past. And typically in Q1, they will continue build up some because typically start from second quarter and go to third quarter, our capacity will be start to tighten up, and they have best possibility to get the parts from us, and therefore typically they always build up more inventory in Q1, so it would not be surprise to us if they increase, but so far we do not forecast in our forecast there will be increase, but typically there may be.

Okay. Do you anticipate, though, they'll continue to build inventory into Q2? Or do you think they'll get to kind of a level of inventory where they are comfortable with after Q1?

They would love to build up additional inventory. But depend on our growth, our own growth, and depend on our output of our manufacturing facility, they may not able to build additional inventory.

And then just last question from me, can you maybe just give some color on the end markets in terms of your expectations for Q1? Do you expect at all your end markets will be tracking to above seasonal on Q1? Are there any that are going to be at or slightly below seasonal Q1?

Well, if you are compared with seasonable, then we see now all the markets, okay? Even computer, typically Q1 is slower from seasonality point of view. But we see some slowdown, but it's still higher than seasons.

And so, if you consider just for seniority, actually in our opinion it's all the end markets we participate are growing.

Shawn Harrison, Longbow Research.

First question, looking at capacity utilization within the fabs. I think last quarter it was mentioned that you were targeting about 75% utilization in Zetex, about 85% at FabTech. I'm wondering where those ended 2009.

I think, Rick, you have the number, right?

Yes, that's about where we ended up. In FabTech, we were middle 80s, and in Zetex, we were right below middle 70s.

Okay. And given those capacity utilization rates, is it safe to say that the majority of the CapEx spending in 2010 will be then focused more on the packaging side and not in trying to increase efficiency at the fabs?

You are right.

And then beyond that, as we look to 2010, Rick, maybe you could talk about this, do you think you'll be free cash flow positive for the year, and maybe just how we should think about that cash being deployed in terms of more convertible debt being repurchased or some other uses?

I think we, of course, don't make statements for the full year, but we do expect positive cash flow. I would say that convertible notes are, if you look at the discounts versus the par value, I don't think that you're going to see us purchase too many convertible notes back.

And we have plenty of opportunities in the assembly test area for CapEx, so I think Keh-Shew is going to concentrate on capacity expansion and other M&A opportunities that come along.

Then two brief questions to wind up for me. With your comment on good pricing right now, does that mean you're are getting any price increases in the market or does that just mean generally flattish pricing?

And then, second, there was a news release I believe out last week saying a company called Dialog Semiconductor acquired some power management technology from you. If you could just elaborate for me on exactly what that was?

From the pricing point of view, we typically don't like to go to our customers to raise the price. So I should say the price is stabilized, and then, what we can do typically is adjust to the product mix, and that product mix will be -- enable us to increase the average selling price. And what is your second question?

There was a news article that came across the wire that -- it looked like Diodes had sold some power management technology to a European semiconductor firm last week. I was just -- maybe if you could elaborate on exactly what that was.

This -- we through the acquisition of the Zetex [benefit] technology they built, and actually Zetex acquired that technology through some acquisitions several years ago.

And that technology is really a good technology. It's just not really aligned with our products developing direction or our product strategy. It's a growing technology. And Dialog, they are neat, and therefore, we make the deal between those two companies.

It's not a big acquisition. But the key thing is the technology is great, and there's good for them. But for us, it's just not aligned with our product strategy or product directions.

Thank you very much and congratulations on the good results.

Brian Piccioni, BMO Capital Markets.

Thanks for taking my question. Just to get back on the issue of seasonality, obviously given the acquisition of Zetex and the economic environment and the recovery from the economic environment, how would we -- just filtering through all that, how would we try to paint the picture for what normal seasonality would be when business stabilizes, understanding that there's likely to be growth on top of that?

Well, if you look back to history, typically Q1 is a 5% to 10% negative [overall] from Q4 of previous year. That is typical, and the Zetex acquisition, it enabled us to get into more markets, especially -- and enabled us to sell those Zetex products into the Asian market, including our own customers, our Asian customers.

And therefore, it enabled us to start to get to the record setting in the quarter instead of negative growth quarters. So, I'm very pleased with the acquisition and provides us an opportunity to setting the record, revenue, in Q1.

I'm sure you don't want to give us an outlook for Q2 and Q3, but normally speaking, would we expect Q2 to be a higher quarter than Q1 or a lower quarter than Q1? Because, again, now that you've brought the two businesses -- you've no sooner brought the two businesses together than we ran into the economic problems and recovering them from, so we don't see a clear pattern from the historical quarterly seasonality. So, what would the quarter-to-quarter seasonality probably look like when things stabilize?

Second quarter is very difficult to predict. Especially if you look at typically Q1 go down and then Q2 come back, and Q2 typically is even to Q4 previous year or Q3 previous-year numbers.

But this year, because Q1 didn't go down, therefore it's very difficult to see is Q2 going to be continued growth or not. And that's one thing is -- I touch on it. Everybody here -- I am in Taiwan. Everybody here try to understand it's actually -- look at the March month because after Chinese New Year, if the March month is very hot, then you will see the momentum continue through Q2.

But if you -- if the March month starts to slow down, then Q2 will be probably flat. But, we don't know. And everybody is looking at third quarter -- month. March month.

In the press release and in the spoken comments, there was -- you were referring to continued momentum in the first half. Presumably that was just a statement of visibility, not so much that you saw something bad happening in the second half. Is that correct?

You are right. We just say we don't know the second half, but with Q1 we can feel -- [it's] the half. You know, stronger than normal quarter. But years -- that's all we're talking about.

I just figured I'd ask. And then, finally, you mentioned new-product directions and that sort of thing. Is there anything you can share with us, you know, markets that you hope to open up, new-product verticals, or anything like that? Are you -- would you rather it be a surprise to your competitors?

I would prefer some surprise.

Ramesh Misra, Brigantine Advisors.

Dr. Lu, in regards to your CapEx level of 10% to 12%, how much capacity expansion would that support on your facilities -- back-end facilities in China?

Majority of our capital expenditure, I think like we've mentioned previously, would be all focused on packaging -- back-end capacity. And with 10% to 12%, and we intend to be close to 12% than close to 10%, and we might spend, because it depends on first quarter, third quarter situations, we might spend earlier in the second quarter for fourth-quarter growth. Okay (multiple speakers)

How much increase in capacity would that result in, approximately?

Ramesh, if I can step in for a second, I think it's really hard to say because there is a different mix of packages, and some packages generate more units and revenues, so I think it's really hard to classify it in just units. Because for our analog product lines, we have some more sophisticated packaging that we don't get as many units but we get more revenue value.

So, the key picture is is we're positioning all of our key packages for growth and evaluating it monthly to make sure that we don't stymie any product lines or any of our new product lines with insufficient capacity.

Okay, Mark, so you'd probably guess my follow-up question. If it's difficult to gauge on a unit basis, is it easier to gauge on a dollar basis?

Yes, it goes the same way. I think you understand our typical growth patterns and objectives. And I think there should be nothing to say that we're not trying to drive ourselves those directions.

Got it. In regards to the LED drivers that you've been talking about, are these predominantly for the handset market or are they also for laptops? Does it even include TVs?

Dr. Lu, do you want me to take that?

Yes, go ahead.

Most of our LED drivers' legacy from the Zetex side has been more about in driving higher-powered LEDs. Now, some of our recent product announcements have been looking at -- and last -- couple of quarters ago, we announced something for small-diameter displays and so forth. So I think you'll see our product direction moving more into the display world rather than flashlights and outdoor lighting and so forth.

But I'd say the predominant amount of our revenue now is coming from the present historical Zetex product line, with the direction moving towards the display market.

And then, in regards to Q1 ordering patterns, and I guess, Dr. Lu, since you are in Taiwan, you might be able to comment on this, any difference in regards to order patterns out of Asia surrounding the lunar new year? Or is it pretty in line with historical trends in Asia?

Actually, in January, even until today, a lot of customers want us to ship ahead because this year Chinese New Year is little bit late. You know, it's -- Chinese New Year start from February 14, which is second half of the February. Okay, so this year, Chinese New Year is later than normal, and we can see a lot of pull-in for January that's -- and even until today because they are prepared for gear back up at Chinese New Year shutdown.

And that's why it's very difficult to see, and as I earlier mentioned, I will know more after Chinese New Year and look at the March ordering pattern, and that will tell me how strong the second quarter will be.

Just a very quick follow-up on that, Dr. Lu. So the strength in your guidance for Q1, is that driven predominantly by strength out of Asia or is it 50/50 Asia versus North America and Europe?

I think in our speech, we said actually Europe and U.S. is not just stabilized. They are -- we see some recovery. So, yes, if you look at them both, U.S., Europe, and Asia, all the region is growing.

And one quick final one. In terms of M&A activity, are there any product area holes that you see that you would like to fill or any particular direction that you see transitioning Diodes towards through M&A?

Well, we are looking at different opportunity, and like I previously said, I will prefer some surprise if we get into the new areas.

Congratulations, guys. Take care.

Steve Smigie, Raymond James & Associates.

Congratulations on the good quarter and guide. I was hoping you could talk a little bit about option expense. I'm not sure if you guys gave a breakout by R&D versus SG&A versus COGS? If you could give that, if that's not in the press release somewhere and I missed it.

Yes, it's not in the press release. We didn't give a breakout of that. I don't have that right in front of me.

Maybe we can talk later. I guess, could you give some sense what you're thinking that expense might be in Q1?

It's probably going to be about the same as it was in the fourth quarter.

Okay, and then [a tray] utilization, it seems like you still have pretty low utilization in your fabs. So would it be reasonable to expect that, since things are tight, that you would see both a mix improvement plus some continued pickup in cost coverage, or -- I think it's higher utilization is a better way to say it, that would drive higher gross margin throughout the balance of the year, potentially?

You're talking about the back end or you're talking about front end?

More the front end. It seems like the front end's still got some utilization to recover.

Yes. [Unknown] if you -- this separates from Zetex and other fabs. FabTech -- we tried to grow our sales. In the past, almost 50% of that capacity was functionally for other customers, and we have been growing ourselves to utilize that fab, and unfortunately it's our customer who, essentially from us, they are not really fully recovered yet. That's why it caused our utilization is not fully loaded.

But we will continue to grow our areas. So we still have the room to grow in our FabTech.

In Zetex, if you remember in the history, we shut down the four-inch line and now we try to go the six-inch line, and we actually authorized some capital equipment for each -- during the downturn last year, and then we tried to balance then. So we actually authorized another [gear] of the equipment-based power last year and tried to balance the nine.

So we still have some more room, and actually the capacity was still growing some in the -- until the second quarter. So that piece of equipment -- on some piece of equipment the balance of nine will be installed, will be delivered during Q1, and then to start production, start from 2Q, so it starts from 2Q. We still had even more capacity [up areas].

Then, something you had talked a little bit about, how you are thinking about guidance here in terms of how are turns this quarter in terms of your guidance versus what you did in Q4? Typically, you guys are pretty conservative in terms of how you guide, and you guys beat the last couple of quarters coming at the high end of your range. Is it fair to say that you behave in your typical manner or are you more aggressive in the guidance this quarter?

Well, you know me, right? I'm a little conservative and I prefer we -- if we want to be surprised, we would prefer a positive surprise instead than a negative surprise.

Christopher Longiaru, Sidoti & Company.

Congratulations on the quarter and the guidance. I guess my question has to do with the fact that a lot of my peers are concerned about inventory levels going forward, and I wanted to know if there is anything that you've seen in your sales channels or in the inventory channels that would lead you to believe that there is an inventory problem or that there is double ordering going on? What's your take on that? And -- well, I'll leave that one and I'll continue.

I really don't concern the inventory level because, like back in our speech, we typically [sit] at much higher inventory level than our December inventory.

If you remember 2008, we actually get 2.8 months, and this quarter -- in December this year, we only get two months. So I'm not really concerned about inventory level our distributor had because this is our [bitumen] always. You have some -- I'll [dispute] if you have some inventory in Q4 and then build up some more in Q1, and then start the decrease the inventory in Q2, Q3, and then come back to build up again.

So, we are not concerned. From tougher order point of view, it may be of some but not in our BTS because our lead time is very short and so, therefore, there's no reason they keep us double orders. So, I'm not concerned Diodes bitumen has a double order, either.

Great. The other question I had was just on the gross margin line, you've still got a little bit more utilization to fill, and I know you're going to spend money on the packaging side of that to get that rate up. What do you think your gross margin can go to at full utilization at this point?

Well, our goal is always try to get to 35%. That's our -- 35% TPM. That's our BTS model, but I'll always let investors know, we focus more on the GPM dollar instead of GPM percent.

And if you see our announcement, most important is gross profit increased 83% over prior-year quarter. So this is more important, is profits -- gross profit instead of gross margin as a percent. Our -- my direction for the Company is growth as fast as we can, such that your gross profit dollars will be continuing to grow at a much, much rapid rate.

And so, our BTS model is 35%, but I'm not -- if I get a growth opportunity, I prefer growth instead of get the percent higher.

Got you. Thank you, guys.

Your last question comes from the line of Stephen Chin, UBS.

Thank you for squeezing me in here. Congratulations on the solid results and outlook.

I had a few questions here. Dr. Lu, first thing on -- in terms of the Shanghai back-end packaging facility, is that facility going through the normal Chinese New Year holiday shutdowns like you normally would? And if it is, I was curious as to how you're able to meet the additional unit growth for Q1 along with the longer lead times that you mentioned earlier.

Is that all -- has that all largely been fulfilled during the January month and also first part of February, or is there additional unit growth that you expect there in March to fulfill the overall demand for Q1 that you are guiding for?

Number one, we do not really plan for the Chinese New Year shutdown. February, we're working on 26.5 days. 26.5, and we only shut down for one day, for the Chinese New Year day, and then [prep] half day for maintenance. During that 1.5 days, for the maintenance, for the gear everything up, so we fill our capacity based on 26.5 days in February.

And what we do, we actually hire more people -- storage more people in -- from December and January. So, to do two things. One is try to gear up more units; at the same time, prepare for people to return from Chinese New Year.

And actually, we do some more actions. We pay for the people needed to stay over the Chinese New Year and give them bonus if they stay, and if they -- for the whole Chinese New Year holidays, if they -- nobody take any vacation, they even get even more bonus.

So we take a lot of actions to prevent any Chinese New Year slowdowns. And, at the same time, you're right, some capital equipment will come in and -- which are authorized in the October/November time frame that were installed and can give us more capacity in the March month.

And I guess, since you're on Asia, is this approach to meeting some of the upside in demand in Q1, is this something that is common from -- or somewhat more common this quarter at some of your customers and potentially even your peers, from what you can see and hear out there?

I do stay here, talk to [a delta] customer and a lot of peers, and everybody -- right now, everybody is asking for more shipment and everybody is very bullish. But, again, very caution, and I think the picture won't be clear until Chinese New Year, until March.

And if March continues the strength like what we see, then we will know what will be happening in the second quarter. And I predict -- I'm very careful. That's why I'm personally here and make sure because we are -- if we see a sign, then who will authorize more capital equipment? Because even until today, we're still hand to mouth, and I reduced capital money just ahead of the need, and I just need to understand in person what will be happening, and especially if second quarter is weak, I'm not worried because then we will use it up in third quarter.

But if the second quarter is very strong, then I need to prepare for the third-quarter growth and even fourth-quarter growth. Then I need to authorize more capital equipment. I just don't want to lose the opportunity of the growth by not investing enough.

Thanks for all that color. And a couple of quick questions for Mark on the product side. Mark, you mentioned earlier in terms of your Asia distributors, they're building some strategic inventory. Are there certain products within the Diodes product portfolio that they are building a little bit of inventory in or is it maybe perhaps the end markets like (multiple speakers)

No, I think it's pretty broad-based and I think that our distributor inventory is pretty customer-specific, so they've drained it down and they're trying to be -- put it back in shape for -- to go forward with their customer base.

But I think that we've also been able to position more of our USB switch product, as well as more of our MOSFET product, in positioning for some new design wins that we expect to ramp in the coming quarter.

So, both inventory has been specific for customers on a broad-based level, as well as some positioning due to design wins for ramp-ups in post-Chinese New Year and early second -- third -- early -- end of first-quarter, beginning of second-quarter ramps.

And lastly, as it's related to set-top box products and also I guess TVs, products that take your USB switches, is it purely share gains or are those new customer, that win that is helping to drive the growth, and are there also underlying upgrade cycles or new product cycles that may be happening at some of your existing customers that's helping to drive that growth? Can you help qualify, I guess, how that's (multiple speakers)

Yes, I would say it's a little bit of all. Clearly, as we grow, everything we grow in USB switches and market-share gains since we are a newcomer a year ago, and if you saw -- and when we talked about our revenue growth doubling in a quarter, so clearly we are taking share and we're making significant progress in that area.

But we're in our second and third generations of some notebooks or set-top box with new products. So I would say that there is passing on to new units and new products in new units, as well as just overall gains.

Thanks again and congrats again on the good results.

I would now like to turn the call back over to Dr. Keh-Shew Lu for closing remarks. Please proceed.

Well, thank you for your participation. 2009 is sure a tough year for us. But with our strong recovery effort, we actually grew to 33%, 18%, 7% quarter over quarter, and positioned Diodes at a possible record-setting -- record revenue setting quarter in this quarter.

And I think we are very pleased with the results of 2009 and looking forward a good and a strong 2010. So thank you very much for participate and, Operator, you may now disconnect.

Ladies and gentlemen, that concludes today's presentation. Thank you for your participation. You may now disconnect and have a great day.